Amazon's $22B supply agreement underscores commitment to grocery

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Dive Brief:

A 10-K filing from Amazon shows the company has increased its future purchase obligations on behalf of Whole Foods Market by $22 billion, according to CNBC. The disclosure of "unconditional purchase obligations" increased to $24.2 billion. Amazon had only $1.6 billion of such obligations before buying Whole Foods, and has never had more than $2 billion, the business network noted.

The multi-year payment agreement extends through 2025, with most of it going to Whole Foods' largest supplier United Natural Foods (UNFI), a distributor of natural, organic and specialty foods.

According to experts interviewed by CNBC, lengthy purchase agreements like this are rare in the grocery industry. It likely reflects UNFI's longstanding relationship with Whole Foods as well as its advantages in health and personal care products.

Dive Insight:

Although recent reports have focused on the changes Amazon is making to Whole Foods' sourcing and product standards, a pillar of the grocers' supply chain will remain unchanged.

United Natural Foods, Whole Foods' longtime supplier, has deep expertise in natural and organic product distribution, including the fast-growing personal care space. For Amazon, UNFI and Whole Foods' operations are so closely meshed that scaling back or disrupting the relationship could throw off Whole Foods' execution during a crucial transition period.

The news comes as a relief for UNFI investors who had worried Amazon might shift to its own distribution operations. The wholesaler reported sales growth of 10% yesterday for this year's second quarter, with earnings per share and full-year guidance ahead of analyst estimates.

Long-term supply deals like this are rare in the industry. As CNBC notes, Kroger and Costco's current purchase agreements don't extend past this year. However, Amazon, which typically uses short-term contracts to squeeze suppliers on price, is new to the industry and probably wants a steady supplier while it tinkers with store delivery, online fulfillment and the integration of its Prime loyalty program. UNFI has strong relationships with many of the large-scale natural and organic brands Amazon seems to prefer.

This doesn't mean the relationship is smooth sailing from here on out, however. Whole Foods has struggled with out-of-stocks recently as it transitioned to a direct-to-store distribution model. UNFI's role in that mishap is unclear, but the wholesaler may be going through a transitionary period in its operations as it works to satisfy its biggest customer. Also, there's no guarantee Amazon won't eventually do as some predicted, and build out its own distribution network, or bring in new suppliers.

UNFI relies on Whole Foods for roughly a third of its sales. Amazon's commitment will allay concerns for the foreseeable future, though the distributor needs to diversify in the coming years in case the e-tailer does eventually decide to scale back its business.

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